5/27/2002 @ 12:00AM

Trouble In Paradise

Why doing business in Honolulu has become nearly equivalent to suicide.

Last fall, when Scott McCormack looked out of his 20th-floor office in Honolulu’s Pacific Tower, he surveyed a landscape he helped shape, along with his father, Michael, and grandfather Thomas. Three generations of McCormacks built several downtown skyscrapers, as well as hundreds of homes and condominiums. Today his office overlooks Park Central in downtown Phoenix. McCormack quit his native Honolulu after Sept. 11 dried up an already-parched economy. But it wasn’t the terrorists who drove him out. It was years of hassling with planning boards, zoning commissions and environmental regulations, not to mention tax collectors. “I look at what’s happened on the West Coast and I wonder, why didn’t Hawaii participate in the last ten years of economic expansion?” he sighs.

Take an island paradise, with year-round balmy weather and immense value to tourists, add a heavy dose of socialism and you get an economic basket case. This year Honolulu gets our booby prize for economic development.

Hawaii has a long tradition of redistributing wealth and the numbers to show for it. Honolulu ranks number 177 of 200 on our list of Best Places to do business, a dismal showing that reflects cellar-level rating in five-year wage growth, five-year job growth and high-tech GDP growth over last year. The city is the ninth-most-expensive place to do business in the U.S., reports Economy.com.

Geography, to be sure, is a curse as well as a blessing. Hawaii is 2,500 miles from Los Angeles and 3,900 miles from Tokyo. Shipping costs jack up the price of everything from sandals to cereal by 30%. Bringing corn feed to the islands is so expensive that the 225,000-acre Parker Ranch raises cattle and ships the animals to Canada for a final fattening and slaughter. You get a better sense of the state’s self-inflicted wounds when you hear where seafood comes from. Water-locked Hawaii consumes three times as much fish as the rest of the U.S., but 75% is imported, thanks to overfishing and the fact that environmentalists, concerned about endangered turtles, have helped shut down the long-line-fishing industry.

Hawaii’s personal income tax on its wealthiest citizens (wealthy being defined as $80,000 in annual income) is 8.25%. It is the only state that requires employers to provide medical insurance to all employees who work more than 20 hours a week (at an average cost of $2,200 per capita annually). Small businesses, 95% of Honolulu’s employers, are being crushed under that law. These problems are compounded by the state income tax rate of 6.4% on corporate net income over $100,000. And then there’s its 4% gross receipts tax on all businesses, profitable or not.

The state taxes everything that moves. There’s a dollar-a-pack tax on cigarettes, which goes into a general fund, and a 5-cent tax on every barrel of petroleum to clean up any oil spills; until recently many homeowners paid into a hurricane relief fund. Trouble is, there’s no guarantee the money will be around for any of these causes. Reason: The state raids these funds to balance the budget. Honolulu has a low per capita debt burden of $175, but it’s rising. The city doesn’t pay for services like education or highways, but routinely has to borrow to meet its payroll.

Hawaii’s sun gives it a natural competitive advantage in agriculture. Why is it that Dole Food, founded in Honolulu in 1851, moved its headquarters to California in 1972 and shut down its canning operation 20 years later? Of Dole’s 51,000 workers, why are there only 325 left in Hawaii shipping 9% of Dole’s worldwide pineapple production? Surely unions had something to do with it: 24% of the state’s total work force is unionized (compared with an average 12% for the nation).

A few bright spots: Del Monte has a profitable niche growing low-acid breeds of pineapple. Monsanto and Syngenta grow weak, inbred corn with a propensity for high yields and a resistance to insects and ship it to the mainland for crossbreeding.

But these niche industries won’t stop the slide. Honolulu wages, down 10% from the national average since 1997, fell 3% in 2001; its unemployment rate is 5.4%. In terms of growth, the city is on a par with rusty Flint, Mich. and Youngstown, Ohio.

“There’s this mind-set that if you’re making a profit, you must be screwing somebody,” says Colleen Meyer, assistant minority leader in the state legislature, who fought against a bill to raise fuel taxes and cap gasoline prices–and lost. The state has only two refiners. If capacity ever runs short, either prices will rise or there will be lines at gas stations. Fidel Castro would feel right at home here.